3 reasons to keep Woolworths Limited on your watch list

Credit: James Arboghast

Woolworths Limited (ASX: WOW) is up against it.

Source: Google Finance

Source: Google Finance

The once market darling’s fall from grace over the past 24 months has been nothing short of astounding. Down around 44% since its 2014 high, Woolies is clearly facing some difficult decisions.

Here are three reasons to keep Woolworths shares on your watchlist:

  1. Competition. Competition in supermarkets is heating up. Gone are the days when the duopoly of Coles – owned by Wesfarmers Ltd (ASX: WES) – and Woolies reigned supreme. While they are still the grocery market leaders, Aldi is cutting into their dominance, and also disrupting Metcash Limited’s (ASX: MTS) IGA stores. The ongoing growth of Costco and online competitors could also begin crimping margins.
  2. Big W. Woolworths’ General Merchandise division is largely made up of Big W. Following yet another poor quarterly performance from the discount retailer, Woolworths expects a full-year loss and has initiated a comprehensive review of the business. While the business isn’t a key addition to group profit, if the company exits the General Merchandise market, following the divestment of Masters and Home Timber and Hardware, Woolworths’ model will be very lean and more dependent on grocery.
  3. Dividends. Up until recently Woolworths’ track record of dividend growth was superb. But now looking down the barrel of more competition and tighter margins, it’s unlikely shareholders of the supermarket operator will enjoy that type of dividend growth.

Foolish takeaway

There’s a lot to like about Woolworths, and it remains Australia’s leading supermarket operator. However, the days of robust sales growth, wide profit margins and big dividends appear behind it.

Further, without a home improvement business, personally, I see few avenues for long-term growth. Therefore, it may be best to keep Woolworths’ shares on your watchlist, for now.

Rather than buy Woolworths' shares, I'm looking for other - faster growing - dividend shares to add to my portfolio, like the one The Motley Fool's expert analysts hand-picked as their best dividend share idea for 2016.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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